Effective Pricing and Markdown Strategies

By Marianne Wilson

From increased selling channels to consumer caution, to eroding customer loyalty, today’s retail environment is extremely challenging. Discounting slow-turning products to allow for sales of high-margin items as a way to improve margin performance is common practice. But many retailers still struggle with how and when to mark down an item.

“The challenge of meeting margin goals while offering prices appealing to consumers has made time-phased markdown decisions a critical component of the product lifecycle strategy,” said Jane Fazzalari, VP retail industry strategy, JDA Software Group, a leading provider of innovative supply chain management, merchandising and pricing excellence solutions, Scottsdale, Ariz. “It can cost a company dearly if done incorrectly. Therefore, more than ever, retailers need an optimal pricing strategy to achieve their business objectives.”

To help retailers better understand when and how to mark down a product and maximize sales, JDA Software Group offers the following merchandising and pricing recommendations:

Deliver localized assortments. Seasonality, uneven selling cycles and fluctuations in consumer demand can all have a negative impact on sales, causing inventory stagnation or missed revenue. Markdowns are therefore inevitable. However, a truly consumer-driven retail business can minimize markdowns by recognizing its products’ attributes and the shopping habits of its customers -- demographics, geographical conditions, calendar holidays, etc., so that the right product is delivered to the right store and sold at the right price.

A localized assortment strategy that is tied to a retailer’s demand plans is one of the most effective ways to improve profit margins without slashing prices. It requires that retailers understand transaction-level data and make accurate forecasting and merchandising decisions that match specific consumer demand. When possible, retailers that implement a localized assortment strategy should also match their pricing and promotions to assortment lists at the store or store-group level.

Have a comprehensive view of demand. When assortments and product promotions fail to move inventory, markdown clearance becomes the last resort. Aged inventory in the store must be liquidated to make room for new inventory. In addition, today’s economic uncertainty has turned many consumers into discount shoppers. Therefore, markdowns can drive traffic into the store and ultimately help products sell faster.

But how do retailers determine the optimal markdown price and still manage to meet margin goals? They must assess the true margin impact of each product, tailor markdown plans by store/location, factor in the price sensitivity of their customer base and understand the opportunity costs. For example, a 40% markdown on new summer apparel at mid-season might increase sales and prevent the potential losses, as compared with offering a 70% markdown on summer apparel at the end of the season when shoppers have already set their sights on fall collections. Advanced technology that enables retailers to use a set of business rules that control minimum/maximum price reductions, the number of reductions and the price formats for each product will help close the gap on lost sales.

Link pricing strategies to space and labor management. Typically, the three greatest expenses for retailers are inventory, labor and real estate. Even if localized assortments and optimized pricing help move inventory, mismanagement of the store space and labor can still hurt net profitability. This has led some retailers to shift to smaller stores, leaner assortments and faster logistics. Hence, product replenishment has moved from two to three times a week to enhance shelf productivity.

Additionally, markdowns and product promotions may create extra activity in the store. A store staffed with the right number of associates to meet store-specific traffic demands can help retailers save on labor costs and capture revenue opportunities.